Pride/Hughes/Kapoor Business, 10th Edition
Audio Review Transcript
Chapter 1 Exploring the World of Business and Economics
3. Define economics and describe the two types of economic systems: capitalism and command economy.
To satisfy society’s needs and make a profit, a business must operate within the parameters of a nation’s economic system. Economics is the study of how wealth is created and distributed. Economics issues can be analyzed from two different perspectives. Microeconomics looks at the decisions made by businesses and individuals, whereas macroeconomics is the study of the national and global economy. The way in which people deal with the creation and distribution of wealth determines if a nation has a capitalistic or command economy. Economic systems differ in two ways. The first way has to do with ownership of the factors of production, which include natural resources, labor, capital, and entrepreneurship. (An entrepreneur is a person who risks time, effort, and money to start and operate a business.) The second way is in how they answer four basic questions: (1) What goods and services—and how much of each—will be produced? (2) How will these goods and services be produced? (3) For whom will these goods and services be produced? And (4) Who owns and controls the major factors of production?
Capitalism is an economic system in which individuals own and operate the majority of businesses that provide goods and services. It’s based on Adam Smith’s theories that people, not government, should be in charge of creating wealth and owning and profiting from resources. He used the term “invisible hand” to describe how an individual’s own personal gain benefits others and the nation’s economy. He believed that economic freedom would produce competitive markets where buyers and sellers could enter and exit at will. This led to a market economy—which is an economic system in which individuals and businesses decide what to produce and buy, and the market determines how much is sold and at what prices. But the government does control some areas, making the American economy a mixed economy, with elements of both capitalism and socialism.
Our mixed economy answers the four economic questions through the continuous interactions among households—which are both resource owners and consumers; businesses—which exchange money, resources, and goods in an ongoing flow; and government—which is responsible for protecting and promoting the public welfare. Today, over two-thirds of our nation’s total production consists of consumer products, which are those goods and services purchased by individuals for personal consumption.
A command economy, on the other hand, is an economic system in which the government decides what goods and services will be produced, and how they will be produced, and what prices will be charged. A centralized government thus provides the answers to the economic questions. Socialism and communism are examples of command economies. In a socialist economy, the government owns and controls key industries, although individuals may choose their own occupations and may own some small businesses. Communism, based on the writings of Karl Marx, describes a classless society whose citizens together own all economic resources, and contribute and receive benefits according to need. Communism did not produce the desired outcome however, and very few communist economies exist today. (LO3 ends)